Citigroup (C - Free Report) delivered an earnings surprise of 6.4% in second-quarter 2020 on robust revenue strength. Earnings per share of 50 cents for the quarter handily outpaced the Zacks Consensus Estimate of 47 cents. Results were, however, down significantly from the prior-year quarter.

Citigroup recorded higher revenues on investment banking and market revenues during the reported quarter. Though equity market revenues disappointed on a more challenging environment in derivatives, and prime finance and securities services revenues declined, fixed income revenues were on an upswing reflecting strength in rates and currencies, spread products and commodities. Moreover, investment banking revenues increased on solid underwriting business, partly muted by lower advisory business.

Additionally, fall in expenses was on the upside. However, elevated cost of credit due to the pandemic is a major drag.

Net income was $1.3 billion compared with the $4.8 billion recorded in the prior-year quarter.

Revenues Improve, Expenses Down

Revenues were up 5% year over year to $19.8 billion in the second quarter. The reported figure also beat the Zacks Consensus Estimate of $19.2 billion. Higher revenues from Institutional Clients Group (ICG) mainly led to this upside, partly offset by lower revenues from Global Consumer Banking (GCB) and Corporate/Other.

In the Institutional Clients Group (ICG) segment, revenues came in at $12.1 billion in the quarter, up 21% year over year. Higher investment banking and fixed income market revenues were partly muted by lower equity market revenues and corporate lending.

GCB revenues decreased 10% year over year to $7.3 billion. Lower revenues in North, Latin America and Asia GCB due to the pandemic resulted in this decline. Notably, both retail banking and card revenues witnessed declines.

Corporate/Other revenues came in at $290 million, plunging 49% from the prior-year quarter. This downside stemmed from the wind-down of legacy assets and impact of low rates, partly mitigated by AFS gains.

Operating expenses at Citigroup edged down 1% year over year to $10.4 billion. Efficiency savings and reduction in marketing and other discretionary expenses resulted in this decline. These were mostly negated by rise in compensation expenses, along with continued investments in the franchise and coronavirus related costs.

Stable Balance Sheet

At the end of the April-June quarter, Citigroup’s end of period assets was $2.23 trillion, up 1% sequentially. Deposits were up 4% sequentially to $1.23 trillion. The company’s loans decreased 5% sequentially to $685 billion.

Credit Quality: A Mixed Bag

Citigroup’s costs of credit for the June-end quarter were up significantly year over year to $7.9 billion. Notably, higher allowance for credit loss reserves (ACL), the corporate loan downgrades and the qualitative management adjustment mainly led to this upsurge. Cost of credit includes elevated net credit losses of $2.2 billion and a credit reserve build of $5.6 billion, and other provisions of $94 million.

Total non-accrual assets jumped 58% year over year to $5.9 billion. The company reported a drop of 7% in consumer non-accrual loans to $1.8 billion. Nonetheless, corporate non-accrual loans of $4 billion more than doubled from the year-earlier period.

Citigroup’s total allowance for loan losses was $26.4 billion at the end of the reported quarter, or 3.89% of total loans, compared with the $12.5 billion, or 1.82%, recorded in the year-ago period.

Solid Capital Position

At the end of the April-June period, Citigroup’s Common Equity Tier 1 Capital ratio was 11.5%, down from the prior-year quarter’s 11.9%. The company’s supplementary leverage ratio for the quarter came in at 6.7%, up from the year-earlier quarter’s 6.4%.

As of Jun 30, 2020, book value per share was $83.41, up 5% year over year, and tangible book value per share was $71.15, up 5% from the comparable period last year.

Our Viewpoint

Citigroup reported impressive results even this time around on solid underwriting business and fixed-income market revenues, despite being unfavorably impacted by lower equity market revenues and a disappointing advisory business. The company displays capital strength, reflecting liquidity in the coronavirus-impacted environment.

One can consider a strong brand like Citigroup to be a sound investment option for the long term, given its global footprint and attractive core business. Additionally, the company’s growth looks encouraging amid rising revenues, as well as cost management.

Nevertheless, several legal hassles remain concerns for the company. Furthermore, higher credit costs are another concern.

Citigroup Inc. Price, Consensus and EPS Surprise

 Among other mega banks, Bank of America Corporation (BAC - Free Report), Morgan Stanley (MS - Free Report) and Truest Financial Corporation (TFC - Free Report) are scheduled to report quarterly numbers on Jul 16.